Newburg | CPA Tax Brief (01/25/2022)
Do Not Forget the Expanded Retirement Plan Deadlines and Startup Costs Tax Credit
Newburg | CPA Staff Writers- January 21, 2022 (with excerpts from IRS.gov)
SECURE Act Retirement Plan Deadline Changes
A significant retirement plan change that occurred with The SECURE Act was the extension of the deadline for employers to adopt a retirement plan. The deadline to adopt a calendar-based plan will now depend on a company’s tax status and return filing deadline. These changes took effect for small businesses January 1, 2020 onward.
What are the new deadlines for adopting a 401(k) plan?
The extension moved the deadline from the last day of the tax year to the due date of the company’s tax return (including extensions).
Tax Status Deadline For Filing Extension Deadline
Partnerships (LLCs, LLPs) March 15th September 15th
S- Corporations (or LLC taxed as S) March 15th September 15th
C- Corporation (or LLC taxed as C) April 15th October 15th
Sole Proprietor (or single member) April 15th October 15th
The Retirement Plan Startup Costs Tax Credit
Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA, or qualified plan (e.g.- 401(k) plan.) This credit limit increased with the SECURE Act starting with tax years beginning after 12/31/19. A tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.
Who is considered an eligible employer?
- If you had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year and…
- You had at least one plan participant who was a non-highly compensated employee (NHCE); and…
- In the three tax years before the first year, you are eligible for the credit, your employees were not substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.
What type of plans qualify?
401(k) plans, Simplified Employee Pensions (SEPs), Savings Incentive Match Plan for Employees (SIMPLE IRAs)
What is the amount of the credit?
The credit is 50% of your eligible startup costs, up to the greater of:
- $500; or
- The lesser of:
- $250 multiplied by the number of NHCEs who are eligible to participate in the plan, or
In addition, there is also an auto-enrollment tax credit available. An eligible employer that adds an auto-enrollment feature to their plan can claim a tax credit of $500 per year for a 3-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature.
What are considered eligible startup costs?
Ordinary and necessary costs to set up and administer the plan and educate your employees about the plan. Important note: You cannot both deduct the startup costs and claim the credit for the same expenses. You also aren’t required to claim the allowable credit.
What are the eligible tax years to claim the credit?
You can claim the credit for each of the first 3 years of the plan and may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.
How is the Retirement Plan Start-up Credit claimed?
The credit is claimed on IRS Form 8881 (Credit for Small Employer Pension Plan Startup Costs) with your tax return.
If you are considering designing a retirement plan for your business and/or taking advantage of this enhanced tax credit with a recently adopted employer plan, please do not hesitate to contact us for more information. www.newburg.com
Please feel free to contact us directly with any questions.
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